UK welfare spending hits £407B as Burnham faces defense funding gap

Britain's welfare and health spending reached 21% of gross domestic product in the 2025-2026 fiscal year, according to Treasury data released last week, constraining Prime Minister Andy Burnham's ability to boost defense outlays without tax increases or spending cuts elsewhere.

"The sheer scale of welfare spending leaves almost no fiscal headroom for defense without either raising taxes or cutting other programs," said Ben Zaranko, senior research economist at the Institute for Fiscal Studies, which analyzed the Treasury figures.

Welfare spending rose 5.4% to £407.3 billion in the last fiscal year, or 1.9% after adjusting for inflation. Disability payments for working-age adults surged to £66 billion from £44 billion in fiscal 2019-2020, a 50% increase driven by a sharp rise in claims for mental-health conditions including depression and ADHD. Health spending reached £257.5 billion, with six million patients on waiting lists and cancer survival rates trailing European peers. Defense, at £65.4 billion, accounted for 2.31% of GDP — below the 2.5% interim target the previous government had set for 2030.

The gap between current defense spending and NATO's 5% target represents roughly £76 billion annually by 2035, equivalent to nearly a third of the entire welfare budget. Burnham's predecessor, Keir Starmer, faced a backbench revolt within his own Labour Party last summer when he tried to pass modest disability reforms, suggesting the new prime minister has limited political room to cut.

The Fiscal Trilemma

Britain's fiscal position echoes a pattern seen across advanced economies where aging populations and rising healthcare costs crowd out discretionary spending. The last time the UK devoted more than 3% of GDP to defense was in the early 1990s, following the Cold War drawdown. Since then, welfare and health spending have grown from about 15% of GDP to 21%, while defense has halved as a share of the economy.

Burnham, who took office last week, has signaled he is disinclined to pursue the welfare cuts that triggered Labour infighting under Starmer. Instead, his government has pledged to ramp up domestic spending, including a £5,959 annual Attendance Allowance for pensioners with disabilities — a non-means-tested benefit that adds to the welfare bill. The allowance, which pays up to £114.60 per week, is available to anyone over state pension age with a qualifying disability.

Defense vs. Welfare Trade-Off

The Treasury's spending plans already include a 52% reduction in bilateral aid to African countries over the next three years to help finance higher defense spending, according to Chatham House. But the scale of the welfare state means deeper cuts would be needed to close the NATO gap without tax increases.

Britain's total social-protection and health spending at 21% of GDP compares with about 15% in the United States and 18% in Germany, according to OECD data. The UK's defense spending at 2.31% of GDP trails the 3.4% average among NATO members that meet the alliance's 2% threshold.

The IFS has warned that without policy changes, welfare spending will continue to grow faster than the economy, further squeezing the fiscal space available for defense and investment. The last time the UK faced a similar fiscal squeeze — in the aftermath of the 2008 financial crisis — the government implemented a decade of austerity that cut departmental budgets by an average of 3% per year in real terms.

Burnham's first budget, expected later this year, will provide the clearest signal of his approach. Investors are watching for any indication of tax increases, particularly on capital gains or corporate profits, as a potential funding source for both welfare and defense.

This article is for informational purposes only and does not constitute investment advice.